The last-minute tax deal cobbled together in Washington contained several key elements for estate planning. Now advisors can break the good news to wealthy clients:


The estate and gift tax provisions of the American Taxpayer Relief Act of 2012 are permanent, as the “sunset” provisions of prior law have been eliminated. This permanence “is sure to be welcomed by taxpayers as a departure from the constant uncertainty surrounding federal tax policy over the past decade,” contends Rich Behrendt, director of estate planning for Baird’s Private Wealth Management group.


Without the new law, the federal estate tax exemption was scheduled to return to its previous level of $1 million, last seen in 2003. Now, the $5 million exemption amount is in place for the foreseeable future. Indexed to inflation, the exemption amount for deaths in 2013 is $5.25 million.

It’s true that the maximum estate tax rate is now 40%, up from 35% last year, but that’s still below the top 55% rate in effect as recently as 2001. The generation-skipping transfer (GST) tax also has a $5.25 million exemption this year, and a 40% maximum rate for larger transfers.


The new law maintains unified gift and estate tax treatment, meaning that the exemption (now $5.25 million) may be used for lifetime gifts or bequests at death. “The extension of the unified exemption amount will continue to provide affluent families with tremendous flexibility to transfer wealth to children and grandchildren in a tax-efficient manner,” Behrendt points out.


Introduced for 2011 deaths, this taxpayer-friendly innovation also has been retained. After the death of one spouse, any unused portion of the deceased spouse’s exemption amount can be used by the surviving spouse.

Behrendt gives the example of a husband who dies in 2013,  having made lifetime gifts to children that consumed $2 million of his exemption. At death, he leaves his remaining $3.25 million estate to his surviving spouse. The executor of the husband’s estate may elect to permit the surviving spouse to use her husband’s unused $3.25 million exemption, giving the surviving spouse a total $8.5 million exemption: her own original $5.25 million exemption plus the deceased spouse’s $3.25 million unused exemption.

Behrendt cautions that trust planning for married couples still may provide meaningful benefits, even though portability will be available.

GRATs Are Still Great

Grantor retained annuity trusts, which have become extremely popular in this low-interest-rate environment, had faced proposals that would have reined in their benefits. The new law contains no restrictions or limitations on the use of GRATs, so they still have the potential for delivering tax-free gifts.

Valuation Discounts Are Undiminished

“The new law did not contain restrictions or limitations on the applicability of  valuation discounts to intra-family transfers of business interests,” Behrendt notes, explaining that such limitations have been proposed periodically in Washington, dating back to the Clinton administration.

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